Student Loans at Divorce: A refresher on assignment and potential reimbursements

It is no secret that the cost of higher education in America is HIGH. Each year, the average amount of student loans borrowed increases, as does the number of students taking out educational loans. A 2013 study done by the One Wisconsin Institute found, after surveying 61,762 people, that the average length of repayment on student loan debt is 21.1 years. And, they noted, that this is typically longer for those with advanced degrees. Unfortunately as law school graduates, we know the harsh reality of this all too well. But I digress! At any rate, although a standard federal repayment plan is 10-years, it is clear that this is not always realistic. Taking into consideration the available 20-year federal loan forgiveness option, it is becoming more and more reasonable to expect that people will bear the burden of student debt for as long as 20 years.

A 2015 Forbes article reported that the average age of marriage these days is around 29 for males and 26 for females (for an interesting read on marriage readiness, click here. Considering that depending on the degree obtained, the average age at graduation ranges from 22 to 29, it is very common for people to enter marriages with a student loan debt hanging over their head. Now consider this- it has been widely cited that the average length of a US marriage ending in divorce is only about 8 years! So, unfortunately, as Americans our commitment to our student loans quite often outlives our commitments to our marriages. And all this buildup has finally brought me to the true purpose of this article. Here I offer a brief refresher examining what may happen at divorce if one or both spouses have student debt, incurred either before the marriage or during the marriage, and the effect that certain payments made during marriage may have on that debt.

The law is pretty simple regarding assignment of student debt at divorce. If a spouse has a loan that they incurred before marriage or during the marriage, the loan is assigned as that spouse’s sole and separate obligation upon divorce. So, you can rest easy knowing that you won’t be held responsible for the remainder of loans incurred, even during marriage, for your ex-spouse’s education. Note that this differs from the assignment of other community debts (meaning debts incurred during the marriage), as the parties are typically held jointly liable for community obligations at divorce (with some exceptions).

The issues become slightly less clear once the parties begin making claims for reimbursements based on payments made towards student loan debt during the marriage. The community is entitled to reimbursement for community contributions towards repayment of an educational loan, if the contribution “substantially enhanced the earning capacity of the party” (FC §2641.) However, the court can lower or alter the amount of reimbursement depending on certain circumstances.

A big question often becomes whether the community benefitted from the loan incurred for the party’s education. If the community has already “substantially benefitted,” then community is not entitled to reimbursement. And, in California, there is a rebuttable presumption that a substantial benefit has occurred if 10 years have passed since the community repaid a student loan. Alternatively, if BOTH parties had educational loans paid off by the community, then the amounts paid can be offset in determining how much the community might be entitled to.

In determining a community reimbursement for loan payments, the court may also consider the extent to which the education helped the spouse find employment that ultimately lowered their need for support. Also, there can be no repayment ordered for ordinary living expenses, which may lower the amount of potential reimbursement since loans often offer funding over and above the cost of tuition. Note that parties can make agreements amongst themselves that are contrary to the rules and considerations above. This is pretty common. However, in order for an alternate agreement to be enforceable, the statute requires an “express written agreement of the parties.” An argument that an agreement was made verbally or impliedly won’t be successful in this situation.

Some final points regarding community reimbursement for student loan payments:

It is up the spouse who is claiming a reimbursement to trace (or prove) that community funds were used toward the loan payments;

It is also that spouse’s burden to prove, with evidence, that the degree obtained by the other spouse actually increased their earning capacity, although it is not completely clear what a court would consider to be a substantial enhancement of earning capacity;

Nothing stops a court from considering education and earning capacity when making a spousal support order, even if a claim for community reimbursement on a loan is unsuccessful;

If the community is owed a reimbursement, the amount of reimbursement will include accrued interest;

You will not have to pay income taxes on the lump-sum reimbursement; and

The longer it has been since the payments were made, the more difficult will be to prove that the community is entitled to reimbursement.

Please contact us if you are considering a divorce from your spouse, a legal separation, or have questions regarding child custody and visitation. Nancy J. Bickford is the only Certified Family Law Specialist (CFLS) in San Diego County who is also a licensed Certified Public Accountant (CPA) with a Master of Business Administration (MBA). Don’t settle for less when determining your rights. Call 858-793-8884 in Del Mar, Carmel Valley, North County or San Diego.